1 Frank & Bernanke 3 rd edition, 2007 Ch. 4: Macroeconomics: The Bird’s-Eye View of the Economy

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3 The United States Business Cycle, Source:

4 The United States Business Cycle, Source:

5 Great Depression Roaring twenties: by September 1929 stock prices were 40% above their fundamental value. Roaring twenties: by September 1929 stock prices were 40% above their fundamental value. The Fed tried to cool off the market by raising interest rates (providing less money in the economy). The Fed tried to cool off the market by raising interest rates (providing less money in the economy). The slow-down was viewed in terms of typical market adjustments. The slow-down was viewed in terms of typical market adjustments.

6 Great Depression Governments tried to balance budgets, further slowing down the economy. Governments tried to balance budgets, further slowing down the economy. Huge deflation made bank collateral worthless in defaults. Huge deflation made bank collateral worthless in defaults. Bank failures triggered bank panics. Bank failures triggered bank panics. Financial system ground to a stop. Financial system ground to a stop. Falling prices provided incentives to postpone investment. Falling prices provided incentives to postpone investment.

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8 Great Depression Gold standard restricted countries to expand money supply only when they acquired gold as a result of trade surpluses. Gold standard restricted countries to expand money supply only when they acquired gold as a result of trade surpluses. Those countries that abandoned the gold standard (Scandinavian countries, Japan) slipped away from the Great Depression. Those countries that abandoned the gold standard (Scandinavian countries, Japan) slipped away from the Great Depression. To acquire gold, countries passed protectionist policies (Smoot-Hawley in US). To acquire gold, countries passed protectionist policies (Smoot-Hawley in US).

9 Spiral of World Trade: Jan to Mar Imports of 75 Countries. Source: E. Ray Canterbury, A Brief History of Economics, (World Scientific, Singapore: 2001), p. 209.

10 Macroeconomics The need to view the economy beyond the supply and demand of individual markets grew from the experience of the Great Depression. The need to view the economy beyond the supply and demand of individual markets grew from the experience of the Great Depression. John Maynard Keynes published his General Theory in John Maynard Keynes published his General Theory in 1936.

11 Keynesian Macroeconomics Keynes claimed that in the short run total expenditures (aggregate demand) can fall creating unemployment, recessions, depressions. Keynes claimed that in the short run total expenditures (aggregate demand) can fall creating unemployment, recessions, depressions. It is the responsibility of the government to stimulate the economy in these cases through monetary and fiscal policies. It is the responsibility of the government to stimulate the economy in these cases through monetary and fiscal policies.

12 Modern Macroeconomics Keynesian macroeconomics only concentrates on the short run. Keynesian macroeconomics only concentrates on the short run. Living standards depend on long run behavior of the economy. Living standards depend on long run behavior of the economy. Living standards rise as a result of productivity. Living standards rise as a result of productivity.

13 Source: U.S. Department of Commerce, Bureau of Economic Analysis

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17 Source: From about 1750, this iron law of history was broken. Growth began to be no longer invisibly slow nor confined, as it largely had been before, to farming. The new increase in human productivity was staggeringly large: it not only supported a hitherto unimaginable 7 1/2-fold rise in the world’s population, but entirely transformed the lives of ordinary people throughout the West.

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19 Source: Bureau of Labor Statistics:

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24 Types of Macroeconomic Policies Monetary Monetary Fiscal Fiscal Structural Structural

25 Types of Analysis Positive Positive Normative Normative

26 Types of Data Aggregate Aggregate Detailed Detailed